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Eurozone: core inflation will only rise slowly, as cyclical (and structural?) factors will continue to weigh

So far this year, the economic improvement in the Eurozone has only spilled over moderately to core inflation, which, despite nascent upward pressure, is yet to lift itself convincingly above 1%. This inflation weakness is partly due to cyclical factors, as even the strengthened European recovery has not yet eliminated the capacity surpluses that are limiting wage increases. Cyclical indicators point to the elimination of most of these surpluses in 2018, and therefore, in theory, to a sharper acceleration in inflation.

However, taking into account the fragility of these indicators and recent US experience, the probability that this acceleration remains limited is high. Moreover, in the eurozone, as is the case elsewhere in the developed world, inflation is probably also being curbed by structural factors, shifts in the labour market, and regulatory and technological developments. As a result, even though we believe that inflation will indeed increase in the coming quarters, the ECB’s forecast of 1.7% in 2019, in annual average terms, seems a bit high.